|
Higher Education Community Endorsement of Administration Lowering of Interest Rate on Direct Consolidation Loans
July 6, 1998 The Honorable Dear : I write on behalf of the undersigned associations to express our support for reducing the interest rate of direct consolidation loans to the level established by the bipartisan congressional interest rate agreement. We are pleased that the Administration has adopted this rate for direct consolidation loans effective July 1, 1998. In the last decade, student borrowing to finance higher education has increased dramatically. Because of this trend, it has been a central goal of all higher education associations to ensure that borrowers have ready access to federal student loans with the best terms and conditions. We believe that the congressional decision to lower the borrower interest rate to 7.43 percent in the student loan program creates an unprecedented opportunity to reduce the cost of student loans for those students with the greatest levels of educational debt. The extension of this rate to borrowers in repayment removes a statutory barrier that has prevented these individuals from enjoying the benefits of a thriving economy that has afforded other consumers a chance to lower their debt payments. The impact of such a sharp reduction in the interest rate during repayment can be profound. For example, a borrower who owes $40,000 will save over $2,000 on a ten-year repayment schedule by consolidating her loans at the lower rate. If she elects to repay on a twenty-year schedule, the savings would amount to nearly $5,000. While we support the decision to lower the interest rate for consolidated loans, we are acutely aware that this change may produce a surge in consolidation applications that could overwhelm the capacity of the Department of Education's contractor to service the loans. Indeed, just such a servicing failure caused massive disruption last year. We have urged the Department to take proactive steps to avoid repeating a similar failure, such as contracting with the student loan industry to bring private sector expertise to the task, and increasing the resources available at the federal servicing center to encourage smooth and effective administration. Despite our concerns about servicing, we believe that the decision to offer student borrowers the lowest possible interest rate is commendable and will help a large number of recent college graduates reduce the cost of repaying their loans. We recognize that this temporary solution will be subject to review as part of the reauthorization process. We will continue to work with you and the Administration to make certain that the best terms and conditions are available to borrowers in both the FFELP and direct loan programs. Thank you again for your leadership which has made this benefit possible. Sincerely,
Stanley O. Ikenberry
On behalf of:
|